Month: June 2016

General Electric Co. (NYSE: GE) keeps moving closer and closer to being an industrial conglomerate rather than a conglomerate that is part industrial and part bank. While the company has been rapidly selling off financial assets of GE Capital, GE has now finally been notified by the U.S. Financial Stability Oversight Council that GE was voted to remove GE Capital’s label as a “systemically important financial institution.” This also means that GE’s financial operations are no longer in the “too big to fail” category.

Having the “SIFI” designation removed effectively means that General Electric’s financial operations are no longer in the “too big to fail” category. It was the endless financial exposure that GE had ahead of and during the recession which made GE’s stock price fare much worse than peers like 3M, Honeywell and United Tech.

It was back in April 2015 when GE’s Jeff Immelt and Keith Sherin announced that GE would seek to have that SIFI status removed. By selling off so much of the financial services operations and by selling off most of GE Capital, GE can now be evaluated like an industrial conglomerate.

At that time, GE’s lending business was one of the nation’s largest banking businesses with assets of close to $500 billion. This move will also lower capital reserves and regulatory costs for GE and GE Capital. Synchrony Financial (NYSE: SYF) has now been spun out of GE and all share exchanges have been formalized and done for quite some time. The recent weakness in Synchrony has not even had any real spillover impact on GE. That should be further representation that GE is moving up and on in its quest to be an industrial focused company.

GE CEO Jeff Immelt has said that the new market conditions and a higher regulation climate put GE Capital’s necessary returns under its goals for staying in the business. GE Capital’s Keith Sherin also identified that GE would be able to save hundreds of millions in operating costs due to lower capital reserve requirements and regulatory costs.

Another milestone here for the nation’s largest conglomerate is that this was the first SIFI removal with the oversight committee’s backing. GE Capital will also send an $18 billion dividend up to the parent company. That capital is being used for multiple purposes of course, but GE’s massive stock buyback is being targeted at this time to eventually get closer to 8 billion shares outstanding from the 10 billion prior amount. GE’s buyback efforts have taken its outstanding share count down to about 9.2 billion common shares.

GE Capital has now signed sales agreements for roughly $180 billion worth of businesses and assets. It has also closed on more than $15 billion of those announced sales, and it has simultaneously derisked its business since the recession.

Roughly half of GE’s profits were tied to financial lending and financial services at the peak before the recession. Moving forward, that number is shrinking rapidly and may ultimately be under 10% of GE’s future profits.

When so much of GE’s profits came from financial operations, that eventually ended up dragging GE into the danger zone going into the recession. To prove that point, GE’s common stock quarterly dividend of $0.23 per share has been in place since the end of 2014 — but that is still far shy of the $0.31 quarterly payout that was being paid in 2008 and into 2009.

Comment on U.S. GDP Growth and Trade Protectionism

June 29, 2016

The second and final revision of U.S. growth between the final quarter of 2015 and the first one of 2016, released yesterday, was revised upward by 0.3 percentage points to 1.1% at a seasonally adjusted annualized rate (saar). The initial growth estimate reported in late April had been 0.5% saar. Commentary surrounding the report was upbeat. The direction of revisions can be a good omen in and of itself, and moreover, other data suggest faster growth of about 2.5% in the spring quarter, which ends tomorrow.

Cast in a longer span of time, recent growth appears quite depressed. Only once in the last six calendar quarters and five times in the past sixteen quarters did economic growth exceed 2.1% saar, and growth over the latest reported year and a half averaged a mere 1.8% saar. 1.8% also happens to be the average U.S. growth rate since the final quarter of 1999. By comparison, U.S. real GDP expanded twice as rapidly, that is by 3.7% saar, over the prior half century between 4Q49 and 4Q99. In the most recent quarters, whose midpoint coincides nearly exactly with the Fed’s one and only interest rate hike of this cycle, real GDP growth averaged just 1.2% saar, the weakest two-quarter pace in three years.

Nominal GDP also slowed in the latest two quarters. That pace of 1.9% was the second slowest over consecutive quarters since late 2009 as the economy was just emerging from the Great Recession. Nominal GDP growth, by comparison, averaged 7.5% saar in the second half of the twentieth century.

From this downshift in growth gears, two inferences need noting. First, there was a juxtaposition between the Fed finding an opportunity to begin policy normalization in the federal funds rate and a lull in U.S. activity. Officials didn’t plan for that to happen and indeed felt that policy remained so accommodative after the December hike as to exert no drag. The Fed’s experience has been shared by a number of monetary authorities since the Great Recession that have tried to lift interest rates from zero or near-zero policies. It’s not clear whether there is a cause and effect process going on, perhaps through indirect announcement channels. But the experiences so far leave a concern which is whether economies used to ultra-low or negative interest rates can in fact tolerate a return to normal. If anyone can, it would seemingly be the United States, but that possibility remains to be proven.

The second point to be made involves the halving of growth between the second half of the last century and activity since Y2K. Rapidly expanding international trade provided the lubricant for the post-WW2 economic miracle, and a series of negotiated multilateral trade pacts was essential to that process. Even before the Great Recession, Europe’s debt crisis, Brexit and the Donald Trump offensive against trade, however, trade negotiations had stalled in many ways. The problems of job displacement connected with globalization, widening income inequality, ageing populations, and rapid technological innovation must be addressed if democratic forms of government are to retain legitimacy and voter respect. However, the answer ought to lie in devising ways to address the problems without shutting down trade. In the long run, trade tends to expand faster than other components of aggregate demand. Take trade out of the equation, and economic activity will in time slow still more.

Bitcoin has found some footing following a up and down week. Consolidation has occurred during the last day and a half between the $633 and $645 levels. $633 represented a slight resistance level during the run to $780 and is now acting as a strong support level, holding firm both times it was tested.

Bitcoin has shown resilience of late but has few indicators of a continuance of the latest run. The 200MA has been tested at the low on two separate occasions and positive news like Brexit sparked a rally but did not materialize in sustained buying strength. This is not to say that the climb cannot resume, especially if stock markets around the world shrug off today’s rally, but a slow fall back to the $560 resistance level is more likely.

$655-$660 appears to the be key level of resistance if bitcoin is to resume the strong bullish run it has been on in 2016. Should it trade above that level for any amount of time there is little to no resistance all the way up to $680. It is at the $680 level that traders can expect to face strong resistance just as they did in 2014.

RSI continues to be a strong indicator for short term traders with 30 and 70 being the key levels to look at. When RSI approaches or broaches the 70 level there is an almost immediate sell off, with the inverse being true when RSI dips near or below the 30 level. Day traders can simply watch the RSI level and take advantage of this easy indicator. Looking at the hourly TradingView chart below, we can clearly see the RSI pattern.

Traders should note that buying below 30 does not indicate holding until RSI approaches or breaches 70. Sell levels after buying under 30 should consider other knowledge such as resistance levels and any relevant news, but generally profit should be taken quickly.

Summary

Traders engaging in short term day or swing trades can still look to make tidy profits on swift reversals both at the top and bottom. RSI is a simple indicator and the confirmed pattern should be taken advantage of while it lasts. Quick stop-losses and profit taking should be implemented to prevent being caught when the pattern inevitably dissipates.

If you have any questions and comments on the commodities today, use the form below to reply.

Next Week

June 24, 2016

Central Bank Activity: Interest rate policy meetings in Mexico, Taiwan, Romania, the Czech Republic and Israel. The Bank of England’s Financial Policy Committee meets Tuesday. Minutes of the last European Central Bank will be published, and so will the Bank of Japan’s quarterly corporate Tankan survey. Governor Zhou of the People’s Bank of China, and Bullard and Mester of the Federal Reserve speak publicly.

Holidays and Calendar Milestones: Market closures Friday for Canada Day and Hong Kong’s Establishment Day commemorating the 19th anniversary of the former British colony’s handover back to China. Friday is also the first day of the third quarter of 2016.

The late summer weather is a major variable in the natural gas market as North America heats up and more electricity is generated by natural gas to power the air conditioners. This year seems to be making up for lost time since El Nino played its predicted part in a long cool, spring. The National Oceanic and Atmospheric Administration (NOAA) has officially declared this record setting El Nino event, over. This is important as we are currently at the seasonal peak for natural gas and we’ll show that we believe natural gas prices will soften in the near term. However, the transition from El Nino to La Nina will be in full effect this fall and we’ll discuss the trouble that has come with it in the past.

Let’s begin with the trade at hand. Natural gas has rallied more than 30% in less than a month and while there are fundamental reasons for some of the recent rally, natural gas producers clearly believe that prices above $2.50 per/mmBtu should be sold to lock in future production profits. You’ll see on the chart below that the commercial producers have been doing just that as they sold another 15k contracts last week and have driven their momentum squarely into the negative camp.

The trading signals highlighted on the chart clearly show the effectiveness of following their lead.

In order to take a short trade, we need commercial trader momentum to be negative and the market momentum trigger to be overbought. These two indicators quantify the tug of war between the commercial traders’ fundamental sense of value and price discovery, which determines trends, against the speculators who provide the intermediate rallies and declines that provide the turning points for swing traders like ourselves. The current situation shows that natural gas drillers are bearish at current prices and expect the lengthy downward trend to continue. The recent speculative purchases have rallied the market above our market momentum trigger level. Now, we wait for the reversal to trigger our short sales at what could be the seasonal high, barring a La Nina event this fall.

Seasonal analysis by Moore Research shows the typical peak for August natural gas futures is around the third week of June.

As mentioned before, the current rally is flying right into the face of not only producer selling but, also its seasonal peak. We trust MRCI for their seasonal analysis and love it when we can combine it with our own Commitments of Traders fundamental data. Notice on the chart below not only the discretionary COT signals on the weekly chart but also the seasonal peaks, which marked four of the last five highs.

The weekly natural gas chart overlaid with both COT and seasonal analysis.

No method captures every trade. The idea is to stack the odds in your favor. A combination approach from divergent sources can provide powerful reinforcement for each other as they last did in 2011. However, before looking for short trades that can be held through fall similar to the seasonal grain trades, we have to reintroduce a wildcard, El Nino’s reciprocal counterpart, La Nina.

La Nina is the opposing, cooling cycle to El Ninos warming cycle. Historically, strong El Nino events trigger the possibility of a correspondingly strong La Nina. NOAA currently lists the La Nina probability for a late summer through fall event at 75%. The concern is the, “Billion Dollar Weather Events,” section of the NOAA website where five of the last events occurred during La Nina years. These weather events include some of the worst natural disasters in US history and would obviously throw any forecast into garbage bin. The best we can do is be aware of the risks and the variables in play. To that end, we refer to our earlier point of trading the expected near-term weakness from the short side of the market.

Visit CotSignals for more information our Commitments of Traders methodology and programs.

This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.